Non tax advantaged share option schemes

By Tolley in association with Grant Thornton
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The following Owner-Managed Businesses guidance note by Tolley in association with Grant Thornton provides comprehensive and up to date tax information covering:

  • Non tax advantaged share option schemes
  • Summary
  • Key considerations
  • Tax treatment and reporting

Summary

As with any other discretionary option plan, a non tax advantaged share option plan involves the granting of a specific number of options to an individual. These options will provide that the individual can, at an agreed date or point in time, acquire a given number of shares (the underlying shares) for a fixed price.

Given that there is both no upfront cost to acquiring the options, and no requirement for the individual to pay over any monies unless the underlying shares increase in sufficient value, there is little risk attached to the receipt of options. As a result, the tax treatment and tax rates applicable will often appear to be very similar to cash bonuses.

Key considerations
Grant of options

No tax arises on the granting of share options. However, one of the key terms relating to the option will be the price that the individual has to pay to acquire the shares (the exercise price). As no income tax charge arises when the non tax advantaged options are granted, no matter the exercise price, the exercise price can be set at any figure from zero upwards.

ITEPA 2003, s 475(1)

Under a non tax advantaged plan, there is no limit as to how many options can be granted and, as a result, a non tax advantaged plan may be used in conjunction with a tax advantaged plan where the intended award level is in excess of the limits allowed by the tax advantaged share option plan.

Terms of the options

The terms of the options will need to be set out in a suitable legal document (known as the Rules). The Rules will govern all pertinent matters between the company and employee and, given the tax complexities that can occur in such arrangements, a

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